Green Energy & Regional Development II: Policy and Market Design Constraints for the Turkish Energy System

Executive Summary

In this IPC Policy Brief, I discuss the policy and market design framework of energy transitions in Turkey in light of domestic and international uncertainties that maintain natural gas as an option value resource for the Turkish energy system. While the share of renewable energies such as wind and solar power is rising globally, its effect on economic performance remains contested, and the role of traditional fossil fuels remains crucial for the provision of public goods and industrial output. This observed paradox is due to a series of policy and market design choices that reduce the efficiency of financing for green projects and render green transitions dependent on central governments and major energy companies that find themselves in a principal-agent relationship. I model the government’s optimization problem by reporting the baseline constraints that slow down the green transition path: 1. A political economy constraint related to the provision of public goods and therefore the reelection probability of the incumbent government; 2. A financial constraint that implies an ex- clusive dependence on government-provided liquidity without any active role for state banks and, therefore, the provision of subnational finance to local initiatives under conditions of corporate decentralization. In light of the model proposed, I provide policy and market design recommendations for the Turkish energy system including the reform of the Renewable Energy Resource Areas (YEKA) regulatory framework and the intro- duction of a partial bottom-up financing approach that may speed up green transitions in emerging markets.

Introduction 

The expansion of green energy as part of global electricity production has transformed the world economy and has offered new opportunities for profit and development to businesses, governments, and civil society. While the share of renewables in electricity production appears to be increasing much more significantly in advanced rather than in emerging economies (see Figure 1), the role of natural gas still appears to be an important option value for the economic performance of both rich and poor countries—meaning that countries are willing to pay in order to have this resource as a reserve possibility in case renewable energies are not sufficient to cover industrial and household demand. Security developments in Eastern Europe during 2022 have shown that while renewables have become a strategic component of the European Union’s energy mix, there is a long way to go until natural gas and traditional fossil fuels play only a minor role in the overall socioeconomic welfare of EU citizens and the political survival of their governments.

Concluding Remarks 

In this policy brief, I discuss the policy and market design constraints to green transitions with a particular focus on political economy and liquidity challenges that slow down the speed of green transitions, preserve the centralization of credit provision, and reveal the preponderance of natural gas over renewable energies for industrial production. The ex-ante shares of natural gas and renewable energies in the economy predict the ratio of optimal rents that the government can derive from those two sectors toward the objective of its survival in office. Financial centralization consolidates the role of natural gas in industrial production. Particularly, when it comes to Turkey, as well as other major OECD and emerging economies, bottom-up financial instruments and fiscal decentralization are the key measures for the faster advancement of green transitions.